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Victoria Pikovsky

Research & Development (R&D) tax credit relief for startups and scaleups


The Autumn Budget 2024 revealed a mixed bag of announcements for startups and scaleups.

Hikes in CGT and BADR, along with employers’ NICs will undoubtedly have an impact on the UK’s SMEs (small and medium-sized enterprises) and entrepreneurs. Many scaling firms' cashflow and headroom for growth will likely be hit.


Nonetheless, the Chancellor’s “invest, invest, invest” came with an announcement that to aid in economic growth, there needs to be dedicated support for SMEs, along with adequate contributions to industry advancement. 


After rumours that R&D funding would be slashed, the Government committed to protecting the R&D budget and the specific funds for ‘high growth sectors’, along with the extension of vital EIS and VCT schemes.


By announcing £20.4 billion investment into R&D tax credits, the Government reaffirmed its support for an innovation-led economy and their recognition that the UK’s R&D is vital to driving economic growth, and a core pillar to achieving their missions.


Since their inception in 2000, R&D tax credits have undergone numerous transformations.  Businesses of all sizes have been able to benefit from the relief, designed to incentivise investment in research and development that seek advancement in science or technology.


R&D tax relief can provide valuable financial support for any qualifying business which is investing in innovation and developing new processes, products or services.

However, it can be hard to keep up with all the changes in R&D tax law, especially when the impact on certain businesses and sectors can vary.  


2000: Introduction of R&D tax credits for SMEs

2002: Introduction of R&D tax credits for large companies

2013: Introduction of the Research and Development Expenditure Credit (RDEC) scheme

2015: Increase in the SME scheme enhancement rate

2020: Increase in the RDEC rate

2021: Reintroduction of the PAYE & NIC cap

2023: Extension of qualifying expenditures to include datasets and cloud computing costs

2023: Introduction of mandatory Additional Information Forms for all claims

2024: Introduction of the new merged scheme which combines the existing SME and RDEC


A series of recent reforms to the rules means that understanding exactly how the R&D tax relief regimes work, the timing of many different changes which came into force, changes to cost categories, administrative processes, relief rates, subcontracting cost calculations and the scheme’s direct impact on small and medium businesses may be of critical importance to a company’s financial projections.

The complexity and time-consuming nature of claiming R&D tax incentives, combined with the increased rate of the HMRC challenges to the claims (20% in 2023 from a historic 1%) make the preparation of the claim and understanding the potential pitfalls more important now than ever.

HMRC also introduced several big operational changes to improve compliance and make it easier for HMRC to conduct risk assessments:


  • Claims will need to be more detailed with the inclusion of additional supporting information, such as a breakdown of R&D expenditure.


  • Claims will also need to be endorsed by a named senior officer of your company, you will also have to include details of any advisory agent you’ve used.


  • If you are claiming for the first time or have not claimed in the past three years, you will need to submit a pre-notification of your claim to HMRC within six months of the accounting period ending.


Although many accountants claim to be able to complete your R&D tax claim for you, the complex nature of this area of tax often requires a specialist. LEXeFISCAL LLP - an industry-leading tax consultancy - specialises in this form of tax relief and can maximise the claim that is made on your behalf.


LEXeFISCAL’s unique combination of technical specialism and expertise in R&D tax legislation ensures accurate identification of eligible R&D activity, correct claim value and sufficient evidence to validate the claim.


LEXeFISCAL closely collaborates with their clients to understand their innovation processes and sector intricacies. Our team includes experienced tax and accounting specialists and technical consultants to provide comprehensive support.


We make sure that we:


  • Optimise the R&D claim value

  • Minimise the impact on your team’s time and resources

  • Streamline your processes

  • Safeguard against HMRC enquiries by ensuring your claims are low-risk and robust


Our one and only goal is to get you the maximum benefit you are entitled to for innovating in the UK. 


R&D tax credit for fintech


One of the biggest beneficiaries of R&D tax credit are technology and fintech companies – startups and scaleups.


Fintech companies typically focus on developing new technologies, processes, or services to improve financial services. Almost by default most of their activities qualify for R&D tax credit. Examples of the

activities carried out by the companies which are eligible for R&D tax credit include:


  • Payment processing

  • Blockchain Technology

  • Fraud Detection and Prevention

  • Wealth Management

  • Digital Lending

  • Risk Management

  • Open Banking

 

R&D tax credit offers a huge financial incentive for fintech startups and scaleups. Recovering a portion of R&D expenses.


  • Helps them to improve their overall profitability

  • Supports sustainable business growth

  • Aids cost management and budgeting, resulting in increased cash flow and funding for future innovation projects

  • Encourages and rewards technological advancements, giving the companies a competitive edge

 

To ensure a successful R&D tax claim, the company should keep detailed records outlining their processes, qualifying costs and solutions.

There are five distinct areas to which R&D claims apply in fintech.

Qualifying expenditure includes:


  • Employee salaries

Direct staff - developers, data scientists, engineers, product and project managers

Indirect staff - administration, finance, and personnel


  • Subcontractor costs 

For accounting periods starting on or after 1 April 2024 only subcontractors within the UK


  • Externally Provided Works

New rules apply for accounting periods starting on or after 1 April 2024


  • Consumables such as utilities and overheads 

Only the portion of utility costs and relevant overheads (rent, rates, insurance) that relate to R&D activities can be claimed


  • Software

Any software used directly in the R&D


For accounting periods on or after 1 April 2023 - datasets and cloud computing costs can be claimed

Not allowable costs:

  • Capital expenditure, patents and rent

  • Routine data analysis

  • market research

  • sales and marketing

  • any activity that does not directly contribute to technological advancements


The process of making a claim can be broadly outlined as follows.

  • Identify qualifying R&D activities that satisfy the core tests set out by HMRC

  • Collect detailed records of R&D projects, including eligible costs, research processes, testing phases, technical uncertainties faced

  • Identify how these activities contribute to technological advancement

  • Categorise and calculate eligible costs

  • Prepare the R&D tax credit claim, ensuring compliance with HMRC guidelines and regulations

  • Complete the Corporation Tax Return (CT600)

  • Incorporate the R&D tax credit information into your company’s Corporation Tax Return (CT600)

  • Submit the claim with supporting documentation


HMRC will review the claim, evaluate its eligibility, and determine the amount of the R&D tax credit to be awarded. Depending on the options chosen (cash credit, carry forward) and your company’s tax situation, it will receive the R&D tax credit as a reduction in tax liability, a cash payment, or another applicable method.


We strongly recommend working with tax professionals or R&D tax advisors to accurately prepare your claim and ensure compliance with HMRC regulations and guidelines.


If you're a fintech company making an R&D tax relief claim, LEXeFISCAL’s team can help ensure you're compliant with the latest legislation and identify any potential claim uplift.  LEXeFISCAL has a dedicated fintech consultant for the R&D claims preparation.

 

Contact us!




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